Tuesday, August 25, 2015

Krugman out of paradigm

Although it's a terrible word, and an unhelpful communication technique, out of "paradigm" is still the best way I can characterize the continuing struggle academic economics has with understanding how finance, and particularly the monetary system, actually work.

Krugman: I know that may sound crazy. After all, we’ve spent much of the past
five or six years in a state of fiscal panic, with all the Very Serious
People declaring that we must slash deficits and reduce debt now now now
or we’ll turn into Greece, Greece I tell you.

But the power of the deficit scolds was always a triumph of ideology
over evidence, and a growing number of genuinely serious people — most
recently Narayana Kocherlakota, the departing president of the
Minneapolis Fed — are making the case that we need more, not less,
government debt.

Why?

Mosler: This is the right answer- because the US public debt, for example, is
nothing more than the dollars spent by the govt that haven’t yet been
used to pay taxes. Those dollars constitute the net financial dollar
assets of the global economy (net nominal savings), as actual cash, or
dollar balances in bank accounts at the Federal Reserve Bank called
reserve accounts and securities accounts. Functionally, it is not wrong
to call these dollars the ‘monetary base’. And a growing economy that
generates increasing quantities of unspent income likewise needs an
increasing quantity of spending that exceeds income- private or public-
for a growing output to get sold.

Krugman: One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right.

Mosler: Wrong answer. It’s never about ‘when the price is right’. It is always
a political question regarding resource allocation between the public
sector and private sector.

A lifetime ago, Krugman wrote that mathematical models were useful because they took implicit, inconsistent assumptions and make them both explicit and consistent. This was an aid to clear thinking.

His current thinking on monetary operations has a number of implicit assumptions, which is why he believes a fiat state has the same constraints and responsibilities as a household, and why his thinking fundamentally comes from the "sound finance" school of thought and not the "functional finance" school of thought proposed by Abba Lerner back in 1951.